That’s the problem with analyses that look at $X invested in a house or in a stock fund for 20 years …
If Mr. and Ms. Public were not buying the house they would not have $X to invest in the stock fund; they’d be spending the $X, or thereabouts, on a rental. Compared to not investing $X a house is historically a pretty good long term hold choice.
Now buying more house than you need as an investment, that does not make sense. Live modestly and invest the excess in the a decent index fund.
I wanted to bring this up in the IMHO thread I started about conventional (un)wisdom. But there are a lot of homeowners here who are “true believers”. You can’t win an argument with a true believer.
People shouldn’t buy a house if they think it will generate money for them. Because even if it does, on average, it’s not going to be a WHOLE lot after you factor in the costs. And there are better, less riskier ways to invest. But if someone wants what comes with homeownership–a stable lifestyle for their children, a showpiece for visiting friends and family, the fun of DIY and tailoring one’s living space to suit one’s preferences–then buying a home makes a lot of sense. I don’t value these things as much as I value the benefits of renting (flexibility, liquidity, the ability to live in a premium neighborhood, low maintenance responsibility), so this is why I have chosen to keep renting. And yeah, I don’t yet have the 20% downpayment that I’d like to have. It will take me years to have that amount, on a house and in an area that’s worth living in.
A couple usually has to have a sizable downpayment to buy a house in an neighborhood with positive equity. They buy the house and that downpayment is no longer in the bank. It’s in brick and plaster.
That same couple could rent in that same lovely neighborhood and instead of turning their downpayment into brick and plaster, they can invest it. And they can also invest the amount of money they would have to set aside for maintenance costs (1% of the house value). They could take this money and invest it in a real estate index fund, enjoying the same or better ROI than what their homeowning neighbors are going to enjoy (after they’ve paid off the interest), except without:
-worrying about how they’re going to pay for the broken water heater after they’ve just repaired the busted septic tank
-worrying who’s going to get the house after the divorce
-turning down job opportunities because they’re underwater on a mortgage
-bleeding money every month when they can’t find a seller or a renter
-worrying about the next big box store that wants to set up shop outside their front door
-being stuck with a crazy neighbor or burdensome HOA
A house definitely can be a good long-term investment. Emphasis on long-term. I don’t think what happens after 30 years should be the only thing that a person or couple considers.
It is difficult for the average family to find a place to rent that will cost less than 30% of their family income, but meanwhile for owning
Yes, there is also real estate tax, and so on, but rental costs are at highs and home ownership costs are relatively lows. The linked article points out the paradox of course, once mortgage rates rise again the value of the homes may not appreciate so much as the monthly expenses for potential buyers go up. The mismatch between inflated expenses for rentals and relative bargains for ownership is bound to correct some.
Meanwhile what we can use is historic performance.
Let’s run some numbers. Current median existing house sales price is about $210K. Figure $42K down (20%). Given historically low mortgage rates the mortgage payment on that remaining $168K at current rates is $766 a month. Add in real estate taxes and upkeep and it is still likely a lot less than something comparable to that average home would cost to rent.
Now how is that (note leveraged) $42K going to perform as an investment? We have no idea what stocks or real estate will do but let’s use the historic performance that shows stocks trouncing real estate, during a boom time for stocks.
Okay, in stocks that $42K would be returning $420K, a profit of $378K. In the house the $42K got you the appreciation of the $210K house, now worth about $519K, a profit on the $42K leveraged investment of $478K. Not counting how the owner/investor possibly investing the excess from smaller monthly costs spent owning compared to renting.
No question a house is not as often a good short term investment. Not great liquidity and the transaction cost is high compared to stocks. Planning on moving in three years? Owning may not be the best choice. But an analysis that only looks at how much the value of the house appreciates versus how much that amount of money in the market would have appreciated is extremely thin.
Given that $X is going to be spent for housing, not invested, (and right now a lesser $X for owning the same place, inclusive of the mortgage and taxes and maintenance, as renting it) the comparison is the return on the leveraged 20% down amount giving the owner the full appreciation of the real estate versus that same 20% dollar amount in the market. Using that as the metric owning your home trounces renting by a long shot even in that historically booming stock market period.
Looking at Craigslist, renting a house in Silicon Valley would seem to set one back about $40,000 to $55,000 a year. Buying a house for $120,000 thirty years ago, and then selling it at a sizable gain, should be evaluated not only in the rate of return but also the cost avoidance. Obviously, assuming they paid off the house some time ago, they would have had to have made some spectacular investments to offset the rent payments they would have had to be making in the last few years.
I appreciate your thoughts on this, but it’s going to take a lot to convince me that you know something that Mr. Shiller doesn’t.
I know some people very close to me who are feeling the brunt of homeownership. Psychologically, they may be benefiting from something that is “theirs” (minus whatever the bank owns and is more than happy to snatch away). But the costs right now are swamping them. I can understand how a theoretical homeowner comes out ahead of the theoretical renter. But I’m not seeing that in flesh-and-blood people.
IMHO, hedging against inflation is one of the best financial reasons to buy a house.
But inflation also creates a seductive illusion. A house you bought for $30,000 thirty years ago that is worth $140,000 today hasn’t brought you more than what you’d gotten if you’d put that money in a basic savings account.
There is so much wrong with this analysis I don’t know where to start. I’ll keep it simple though and just list a single thing. The person investing would likely reinvest any dividends he makes off of the stock market. Simply doing this changes your expected return from 420,000 to 842,000. Let me know if you want me to list more, but none of what I have is in favor of housing as an investment.
Except for the bubble in the 2000s, housing traditionally has not been much of investment. Historically, cost of housing keeps up with inflation and that is about it. That is actually pretty valuable in its own right, but certainly there are better investments out there. You are buying a place to live, and that is what housing should always be looked as first. If it also increases in value, that is great, but looking at housing primarily as an investment that is going to make you rich is very dangerous.
My house has not increased in value at all really in the last decade or so. But I’m pleased we bought it here in many ways. The school system is excellent and our house charming and comfortable. A friend rents around the block from me. She has to pay $2700 while my mortgage is about $1600. We’ve also invested in the stock market as well. No reason you can’t do both. Most people will have a mortgage and a 401k. While my brokerage account can’t keep us warm and dry, it did provide about 3k in dividend income this month alone.
I think a much bigger problem is simply that people aren’t always given a good education in finances. Budgeting should be done carefully. I am teaching my girls to cook low cost meals, look to garage sales for clothing when possible and understand how to look for and hold jobs. That isn’t the answer to everything but it helps.
Real estate can be a good investment, but you have to know your stuff. Or get lucky. Back in Thailand’s property boom of the 1980s and '90s, before the 1997 crash, various members of the wife’s family bought land like so many others were doing. Stories of riches abounded. But they bought land in places where no one wanted to build anything and still don’t. Now they’re still stuck with it.